Macroeconomics 2301

the study of human efforts to satisfy seemingly unlimited wants through the use of limited resources

consumers and producers in a market setting.

1. Households, both as consumers and resource owners.
2. Businesses demand resources and supply goods and services.
3. Government also demands resources and supplies primarily services.
4. The Rest of the World
The circular flow model shows the relationships between these four sectors.

are tangible items used to satisfy human wants. A good is something you can see, feel, and touch; it requires scarce resources to produce.
Services are intangible activities used to satisfy human wants.

are intangible activities used to satisfy human wants.

A good and service is scarce if the amount people desire exceeds the amount available at a price of zero.
Without scarcity, there would be no economic problem and no need for prices

Traditional, Command, free market, mixed market.
See power point

is the study of the economic behavior of the entire economy. It is a study of the economy as a whole

is the study of the economic behavior in particular markets. It is a study of parts of the economy.

additional, refers to a change in an economic variable, a change in the status quo.

normative economic statement
What should be “opinion”

positive economic statement
Statement of fact, does not have to be true though.

trade off
alternatives that must be given up when one is chosen over another

opportunity cost
of the chosen item or activity is the value of the best alternative that is forgone. You can think of opportunity cost as the opportunity lost.

Absolute advantage
is the ability to produce something using fewer resources than other producers use.

Comparative advantage
is the ability to produce something at a lower opportunity cost than other producers face.

Law of Comparative advantage
states the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that good.

division of labor
is organizing production of a good into its separate tasks.

Specialization of labor
focuses an individual’s efforts on a particular product or a single task.

( 1. takes advantage of individual preferences and natural abilities,
2. Allows workers to develop more experience at a particular task,
3. Reduces the time required to shift between different tasks, and
4. Permits the introduction of labor-saving machinery.)

something that one must have for survival

more of a trivial wish for something rather than a need.

What determines whether a resource is considerd scarce? What is the importance of this scarcity to the definition of economics?
A resource is considered scarce if it is limited in terms of people wants. Ex: Air is a resource but not scarce, oil is a scarce resource.

List the four factors of production and the payments that resource sellers receive for each resource.
1. Labor: the physical and mental effort that goes into the production of goods and services.
2. Land: all natural resources – all so-called “gifts of nature”.
3. Capital: goods that are used to produce and distribute other goods and services.
4. Entrepreneurship: managerial and organizational skills needed to start a firm, combined with the willingness to take risks.

3. List and explain the four basic economic questions.
What goods and services will be produced?
How will goods and services be produced?
How much should be produced?
For whom will goods and services be produced?
Remember: An economic system is the set of mechanisms and institutions that resolve the what, how, how much, and for whom questions. Some criteria used to distinguish among economic systems are (1) who owns the resources; (2) what decision-making process is used to allocate resources and products, and (3) what types of incentives guide economic decision makers.

4. List, define, and give examples of the three basic economic systems. Give two strengths and two weaknesses of each.
traditional, command, market. See power point for pros and cons

6. Explain ration self-interest.
means that individuals try to maximize the expected benefit achieved with a given cost or to minimize the expected cost of achieving a given benefit.

Rational choice takes time and requires information, but time and information are scarce and valuable. Rational decision makers will continue to acquire information as long as the additional benefit expected from that information exceeds the additional cost of gathering it.

7. Explain marginal analysis.
Economic choice is based on a comparison of the expected marginal cost and the expected marginal benefit of the action under consideration. Marginal refers to a change in an economic variable, a change in the status quo.
You, as a rational decision maker, will change the status quo as long as your expected marginal benefit from the change exceeds your expected marginal cost.

8. List and explain five (5) logical pitfalls to be avoided in developing economic theory.
The Fallacy That Association Is Causation: if two variables are associated in time, one must necessarily cause the other. (Fallacy of Superstition)
The Fallacy of Composition: what is true for the individual, or part, must necessarily be true for the group, or whole.
The Mistake of Ignoring the Secondary Effects: unintended consequences of economic actions that may develop slowly over time as people react to events.
Analogical Fallacy: taking a comparison to its logical extreme.
The Fallacy of Absolutes

9. Explain the Law of Comparative Advantage.
states the individual, firm, region, or country with the lowest opportunity cost of producing a particular good should specialize in producing that goo

10. Define the production possibilities frontier, draw a production possibilities curve, and list three assumptions made when using the PPF.
A production possibilities frontier is a curve showing alternative combinations of two types of goods that can be produced when available resources are used fully and efficiently.
Resources are employed fully and efficiently when there is no change that could increase the production of one good without decreasing the production of the other good.

Our model’s simplifying assumptions:
1. We limit the output to just two broad classes of products.
2. The focus is on production during a given time period—in this case, a year.
3. The resources available in the economy are fixed in both quantity and quality during that period.
4. The available technology does not change during the year.

12. List five (5) economic concepts illustrated by the PPF.
2. Scarcity
3. Opportunity cost
4. The Law of Increasing Opportunity Cost
5. The need for choice

13. List four characteristics of our free enterprise economy.
1. Is able to adjust to
2. Individual freedom
3. Decentralized
4. Incredible variety of
goods and services.
5. High degree of
consumer satisfaction

14. Draw and label a circular flow diagram of goods and services and use it to explain the interdependent nature of a market economy.
see powerpoint

When we talk about demand, we are talking about effective demand. To have effective demand, the following conditions must be met:
1. The product must satisfy a want or a need.
2. The consumer must be able to pay for the product.
3. The consumer must be willing to take both, the desire and the ability, to the market.

2. Law of Demand
The Law of Demand states that there is an inverse relationship between the price of a good or service and the quantity demanded.

3. substitution effect
1. The Substitution Effect: When the price of a good falls, consumers substitute that good for other goods, which are now relatively more expensive. Remember that it is the change in the relative price—the price of one good relative to the prices of other goods—that causes the substitution effect.

4. income effect
2. The Income Effect: A fall in the price of a good increases consumers’ real income, making consumers more able to purchase all goods. An increase in the price of a good, other things constant, reduces real income, thereby reducing the ability to purchase all goods. Because of the income effect of price changes, consumers typically change the quantity demanded as the price changes. Money income is held constant along a given demand curve.

inferior good
A good for which demand decreases as consumer incomes rise, or demand increases as incomes fall.

normal good
A good for which demand decreases, or shifts to the left, as consumer incomes falls. Demand increases with an increase in incomes.

diminishing marginal utility
satisfaction a consumer receives from a product after repeated use. Ex: Glass if water after mowing the lawn.

the ability of any good or service to satisfy consumer wants

related products
otherwise known as substitutes or compliments.

is a schedule of the various quantities of a good or services that will be produced, or offered for sale, at alternative prices within a given time period. We are talking about what the seller is willing and able to offer for sale.

Law of Supply
states that there is a direct relationship between the price of a good or services and the quantity supplied.

is the condition that exists in a market when the plans of buyers match those of sellers, so quantity demanded equals quantity supplied and the market clears.

price floor
when the government sets a fixed rate on a certain product, stating that you can pay no less than a certain amount.

Problems:: By setting the price above the equilibrium price, we are
Creating more surpluses and may be adding to the government debt

Price Ceiling
Setting a fixed price where a consumer can pay no more than a certain price.

Problems:: Setting the price below the equilibrium price will create
more shortages and encourage illegal activities such as black markets

Differentiate between a change in the quantity demanded and a change in demand. Illustrate graphically.
Change in Demand shifts the entire demand curve, while a change in price of product moves the point up or down the demand curve adding or subtracting from quantity supplied.

Explain verbally and graphically elastic demand and inelastic demand.
Elastic demand says a small percentage change
in the price of the product will results in a
larger percentage change in the quantity
demanded. The elasticity of a product is
determined by the availability of substitutes,
the percentage of income, and the urgency of

Inelastic demand says a large percentage
change in the price of the product results in a
small percentage change in the quantity

8. List and explain the five (5) nonprice determinants of supply and how a change in any of them will affect the supply curve.
1. the state of technology,
2. the prices of relevant resources,
3. the prices of alternative goods,
4. producer expectations,
5. the number of producers in the market, and
6. changes in the “rules of the game.”